Trade Set-up/Follow Up: COF

COF looks to be one of the longer term short set-ups that is very close and I've been following this one for a  while.

 I'm trying something a little different with the white background, let me know what you prefer.

This is a daily chart showing an Ultimate Oscillator with long settings which I prefer for big picture views, it's double the normal setting at 14/28/56. You can see a positive divergence at the blue trend line to the left and two negative divergences as well as the longer term trendline in trouble, but in the very short term it should act as temporary support, which is along the lines of a XLF bounce/FAZ pullback I want to enter in Financials so it wouldn't be surprising given Financials condition and the divergences yesterday and thus far today in the market. The idea is to short this in to price strength and underlying weakness so it looks to be providing a good opportunity, it may be one of the last as COF failed to make a higher high with the broad market.

 Taking a closer look with the normal settings of 7/14/28 , again there's a recent negative divegrence in the same place as the bigger picture chart above. Also the higher volume on a Star candle is indicative of churning or strong hands handing off shares to weak hands as there was a decline following the distribution/churning event. Again, we have a small bodied possible upside reversal candle right at the longer term trend line so a bounce from here could be very useful as a tactical entry.

 The 60 min X-Over screen is just giving a new sell signal, not quite there as the middle indicator hasn't crossed below its blue moving average yet, but I suspect it will, so this is the perfect place for a bounce in to underlying weakness not only in momentum, but in underlying trade (3c) as well.

 This is the daily negative divegrence at both the highs for 2014 and the failed attempt to make a higher high with the SPX.

 The 60 min chart is a little crowded, but you can see a couple of positives, the last was the August cycle at the start of August. There are numerous smaller divergences, but the main one stretches from point "a" to the left to point "b" to the right, I just didn't want to draw an arrow through the entire chart.

This confirmas what we see on the daily chart and in financials as a group overall.

The 30 min chart is more detailed showing the highs and their divegrence , then the August base 8/1-8/8 and the distribution that is almost exactly the same as the broad market for the August cycle, a new leading negative divegrence so strategically or longer term, the probabilities are very high for a bearish outcome here, thus using any short term price strength as an entry makes a lot of sense as you let the trade come to you.

 The 10 min chart shows a divegrence from mid September that still has some gas in the tank so it could power the move, although it has already began losing its capacity.

And on the same timeframe as the overall market, we have a similar divegrence early this week. I'm  setting price alerts around $84 and slightly above for a potential entry in COF short.

Market Update

As I said Friday and really pressed home yesterday, it's important for the market to create a positive divegrence that can stand here and "maybe" work off some of the deeply oversold tensions in breadth indicators, in the overwhelming number of Industry groups that were red yesterday, and the Dominant Price/Volume relationship showing a huge number of individual stocks down on the day, way, way above anything approaching an average Dominant relationship and this is something we saw Friday as being important in the near term.

This might sound strange from a bearish perspective and a bearish portfolio already set up, all out collapse would seem to be favorable, but there are still some great looking shorts that need a little boost from the market to get in to entry position and I'd like to be able to hit those as well as know when the corrective move from deeply oversold is ending so we have a better gauge on when the market is really collapsing rather than breadth continuing to just deteriorate and wake up in the a.m. with a huge gap down, without having had the opportunity to position in a few assets we have been tracking for a while.

I'll also try to do some trade management as several positions are dropping so hard they are bound to bounce, our HLF short immediately comes to mind.

As for the market this morning, it made the right hand turn from down to lateral yesterday and has largely maintained that this morning. I'm noticing large caps like the Dow are looking the worst as far as underlying 3C trade in this very small, specific area so that's important.

The Most Shorted Index has been of no help at all, no short squeezes...

 MSI vs SPX...

Today's TICK has no trend other than lateral which is appropriate with a bias to the downside-1000

However the SPY custom TICK indicator isn't showing lower lows which gives the market a little room to maneuver here.

I do have an intraday breadth count for the averages, but it takes up so many resources for even a small index like the NASDAQ 100, I may check it out if it looks like there's more downtime today as we continue lateral in this positive divegrence attempt.

 This is about as good as the DIA gets right now on a 2 min chart, the head fake from last week is seen in red, it's massive compared to the current small positive divegrence trying to develop.

I suspect more large caps are going to start breaking down joining the small and mid-caps that have led the destruction thus far.

 IWM 3 min positive has a decent divegrence going, I did take on a small IWM call position for a bounce so I have some confidence in a bounce and small and mid-caps are the most likely to bounce.

The 5 min IWM which I sill think looks the best of the major averages.

The QQQ 5 min positive next to last week's distribution in to the head fake "Chimney" move.

 And a more detailed 2 min QQQ divegrence, obviously these are not strong divegrences, but the market is not buying strong, if anything it's buying oversold positions for an oversold correction, not position trades.

 SPY 5 min positive next to last week's head fake negative, there's no comparison and that was just a minor head fake move last week.

 Here's a close up of the SPY 5 min divegrence.

I'm looking for a slight bounce here to help with a FAZ entry as the SPX has a good portion of Financial representation.

As for HYG, it's not holding up anymore, it's pretty much in line with losses after trying to provide some support yesterday it just gave out,  However, this is EXACTLY what we expected to see, HYG lead the market to the downside even during a corrective bounce early in the week. This is good news from our larger perspective for the week.

MORNING UPDATE

Yesterday's market breadth figures were absolutely staggering, especially as we had not come very far off last week's highs, unlike late July where at least the SPX lost 4% and the R2K 8%. This is an ongoing story for all of 2014 and even before then and it's the truth of the market, with nearly 50% of the NASDAQ COMPOSITE in a bear market and nearly 40% of the Russell 2000 stocks in a bear market, market breadth has been telling the truth of the story while minor gains producing new highs in the SPX and Dow garner all of the attention, people are missing the forest for the trees as they whistle past the graveyard- market sentiment shows that.

I said if breadth doesn't get a break here soon, like early this week, it can go from a deeply oversold status to straight out bear market decline, you simply can't have more stocks trading down by 20% than those making new highs and expect the market to hold. This is where you have to step back and not look at the stock market, but the market of stocks, they are telling the story of the stock market long before it is written.

Small and mid-caps have taken the brunt of the punishment which is why the Russell 2000 looks so bad vs the other averages, but that's creeping in to the NASDAQ 100 and has thoroughly infiltrated the NASDAQ Composite. Also as I have been making rounds the last few hours, I've noticed quite a fe large caps breaking trendlines.

The Russell put in a major 1-day Key Reversal Friday or a bearish engulfing pattern and while I know this is not how we draw downtrend lines, I think it makes its point...

The R2K is down -4.25% from the September highs in a clear downtrend, market breadth is much worse than even the downtrend among one of the largest cross-section representative averages.

You already know what I think of the Dow Transports as we have a phased in position in IYT short...

 We entered a partial position short at 1 and expected a head fake move above the former high as the market's August cycle played out and the expected head fake move there allowing us to fill out IYT at point 2, since it has turned ugly in the candlesticks with minor support just below the trendline of support/resistance.

I thought it would be interesting to look at transports from 2007's top...

 While I don't subscribe to markets acting exactly the same and the numerous charts over the last year that have shown the market at the time compared to some raging bear market from 50 or 75 years ago I have railed against even though I'm very bearish on the market, I just don't believe that the market is that simple. However, the rough blue print for transports seems to be very similar to now.

Even the safe-haven Utilities sector where a lot of long only funds will seek refuge is forming a H&S top of major proportions...

 The Dow-15 Utility Index and a big H&S top, while not my first choice for a short position, I think it's a damning sign for the market. Just for kicks, I looked at the Utes from 2007 and guess what...

While they held up longer than most of the broad market averages, they too succumbed to a H&S top, although in the end were an effective safe haven play as they did not give back the entire previous 5 year bull market and then another 20%, in fact they only gave back about 66% which is far better than the over 115+% of most averages.

In some more of my perusing this morning, as I knew I'd have some time, it looks to me the SPX 500-day is son going to be in play which will be a major sentiment shift, I think the market will try to catch as many bulls on the good foot while they can rather than everyone on the same side of the boat which  is exactly why I don't like it when there's a lot of people calling for tops, although I profoundly respect what Prechter does and believe he's right as you know, I just don't like it all hitting at the same time. 

SPX w/ 50-day moving average, note the small hammer we are seeing in numerous places today, in line with yesterday's divergences and expectations for the early part of this week as breadth is much more oversold now than it was even on Thursday. In fact the indicator shown last night of "% of NYSE Stocks Trading 2 Standard Deviations BELOW their 200-day moving average", stocks deeply below their 200-da
y, rose to levels vs. price I have NEVER seen before and in a single day.

The 3C NASDAQ Composite looks worse now than anytime in the last 15 years, actually more...

NASDAQ Composite's long term underlying flow of funds... Especially bad in2014 as first breadth showed us, then the recent numbers of 47% of the component stocks at a decline of more than 20%, a technical bear market.

I believe as the F_E_D's QE ends, volatility which has been super low the last several years is set to expand rapidly as a major source of liquidity evaporates from the market and even "IF" the ECB engaged in follow on private QE, their program would be no where near the size of the F_E_D's, the PBoC thinks in completely different terms, rather than month by month or even year by year, they plan their economy a decade in advance so their moves tend to be slower, less aggressive. Expect volatility to increase rapidly as we move forward which some of you traders will appreciate.

Now to more recent information. The $USD made a swing high overnight, this seems to have coordinated with gold making a swing low as we have recently seen information that gold may be getting ready for a pullback buy for a longer term trend play, actually GDX which is tightly correlated, but has been stronger in moves is what I'm most interested in. Gold's gap up on the $USD swing high and back down is interesting, but I don't think it's the complete evidence we are looking for as confirmation which I think we will get, we just want it at the right time with high confidence so we have some time there in my view, but you can probably see why I closed the DUSt (3x short gold miners) and took gains as I suspected we would head more sideways rather than down in gold and GDX in coming days.

Also overnight, Futures were hit again, this time on Euro-area PMI's...

This is ES 1 min overnight with the European open at 3 a.m. marked in green. Markit's PMI data overnight was poor for the Euro-area composite as it missed again, but more worrisome for the Euro-area is the reason for its existence, the free trade zone that it creates for the manufacturing backbone of Europe, Germany. German PMI declined and missed again at a print of 50.3, a mere 0.3 above contraction threatening a triple dip recession in Europe. Consensus for the German print was 51.2 so it was a significant miss, rather another miss.

The Chinese PMI data was better than consensus, but as copper has recently swung lower, Iron ore making recent all time new lows and now rubber joining iron ore in all time new lows, you have to doubt the validity of manufacturing strength in China. While the PMI print beat, the sub-indicies are always where the devil is found, in the details. Input and output prices looked bad as did employment and the beat was only 50.5 vs consensus of 50, borderline contraction. The $AUD rallied on the China data as it's the most sensitive local currency, but has given back a lot of the gains since this morning.

The big news overnight obviously was the bombing of ISIS/Syria, which is interesting as Syria has long been on the radar for a campaign to remove Assad, one has to wonder how many Syrian targets are being hit. As far as I know, Assad did not consent to "Coalition" (whatever that coalition may be as many have backed out), forces conducting a bombing campaign in what is otherwise a sovereign nation. Israel got in to the fray as well as they downed a Syrian jet fighter in their air space. I'm sure the House of Saud is very happy as is Qatar which would love to run an oil pipeline through Syria, but Assad needs to be removed to that end.

Some say the bid in gold was a safe haven bid on the bombing campaign, although it matches well with the $USD pivot high and the market typically responds favorably to action, "When the missiles fly, it's time to buy", as uncertainty in the run-up is removed, the thing the market hates the most, "uncertainty". In any case we've been tracking divergences there long before the bombing started, whether they are related to inside information, who knows, but they are also along the lines of our longer term expectations from July.

Oil is obviously up, we'll have to take a closer look at USO and will.

As far as overnight markets, Shanghai was up +.87%, Hang Seng -.49, Nikkei down -.71% with Europe currently (at last look), seeing the FTSE 100 down -1.29, the DAX -1.,31% and the CAC-40 -1.44%.

I suspect we do get the divegrence to try to work off some of the deeply oversold conditions everywhere last night, but I don't think repair is remotely possible at this point and it's just a short matter of time before these deeply oversold conditions will no longer mark a short term correction, but instead will just see the entire facade crumble as there's simply less and less support for the averages.

Now, on with out day.

Thus far we seem to have plenty of time for entries as we want to move on price strength and our divegrence , at least in the IWM this morning, which is why I knew I had time to do the research and write this morning, looks like this...

The right hand turn expected yesterday now clearly in place and the 5 min IWM positive divegrence as expected Friday is gaining some ground.

Daily Wrap

Lets back-up. Friday's Daily Wrap which was posted after our The Week Ahead forecast for this week, ended with this paragraph summing things up nicely and scary accurate...

"Finally, as I said in the week ahead forecast, I think early Monday we'll see some weakness, perhaps in to a bounce later in the day and maybe in to Tuesday, I expect HYG to decline from there as it has already started falling apart. If the 3C charts don't put together an intraday positive after Monday morning, the market will be in big trouble fast, however based on breadth like the S&P and Morningstar sectors, I'd expect at least 1 day of correction to allow them to try to work off some of that oversold tension, but oversold can quickly turn in to bear material, that's how this market will end.

Have a great weekend."

As I said this morning, I don't like it when a bunch of people are calling for a top at the same time, the market always finds a way to make the greatest number of people at any one moment, WRONG.

So we had 2 Hindenburg Omens Thursday and Friday, the clusters tend to be more effective. As I said this morning, the H.O. alone doesn't impress me, we've seen many come and go with nothing following, however they do tend to almost always precede a bear market or major decline, which would suggest they are not a forecast of a decline, but rather a pre-requisite that is present before most major declines.

I also mentioned Prechter of Elliot Wave notoriety saying they are short the 3 majors averages, this was Friday.

In addition, UBS's Art Cashin has noted how Sept 22nd, especially after new all time highs, tends to lead to market crashes. 

BofAML also came out ad noted the bearish seasonality of the week after triple/Quad Witching in September as being one of the worst weeks of the year (Quad Witching was Friday), with the SPX down 62% of the time over the last 32 years and down 10 of the last 12 years.

EVERYONE apparently knows about the Russell 2000's DEATH CROSS today,

The death cross is considered a bearish (although we've known that about the R2K for quite sometime, especially as this is the average that should lead risk on rallies) cross-over of the 50-day moving average below the 200-day moving average, we've been talking about it for about the last week, but now it's out there for everyone to see.

A long term member also pointed out that in the vicinity of out Igloo w/ Chimney top which was predicted over 3 weeks ago, are some interesting moving averages...

 60 min SPY with a 200 bar moving average right at the head fake move completion (Igloo's chimney from last week)...

60 min QQQ with a 200-bar moving average...

And the DIA on a 60 min chart with a 50-bar moving average sitting right there, all technical no-no's that can shift sentiment much more than it already is.

Keep in mind my last paragraph from Friday's Daily Wrap and specifically...

"If the 3C charts don't put together an intraday positive after Monday morning, the market will be in big trouble fast...

oversold can quickly turn in to bear material, that's how this market will end."

Keep these two sentences in mind throughout this post.

I digress... Compared to last week's F_O_M_C, Scotland's independence vote, the BABA IPO and AAPL's I-Phone 6 release, this week is pretty boring, although we do have some important macro economic data culminating with the 3rd revision of Q2 GDP on Friday, however, there's a distinctly different flavor and last week seems almost perfect in hindsight for the head fake chimney move we forecasted the previous Friday.

Trade was ugly from the overnight session as the "It's different this time" crowd quickly found out from the BOJ, the PBoC and the ECB that they'll not likely be substitutes for the F_E_D's lack of liquidity as QE ends and rate hikes start. The conspiracy theory that the F_E_D was passing the mantle off to these other central banks was blown to pieces over the weekend although Draghi did seem to try to walk back some of the weekend hawkishness from his comrades today during a speech, but what is clear and reflected in overnight trade as well as early trade,  the punchbowl is finally being taken away, NO IT'S NOT DIFFERENT THIS TIME, IT NEVER IS!

The averages looked like this today, kind of an inverse European close effect...

All closed lower, but that right turn we wanted to see earlier this afternoon/late morning based on our forecast....If the 3C charts don't put together an intraday positive after Monday morning, the market will be in big trouble fast... actually was there right on time, which is really just about allowing certain watchlist assets complete their process and offer us the best entry and lowest risk mostly on the short side. The green arrow is the European close.

I always warn about the F_E_D / F_O_M_C knee jerk effect, but here's the evidence of those warnings...

All major averages have lost all gains since the F_O_M_C knee-jerk reaction last week except the Dow, still hanging on to a minor gain. The Russell 2000 is down about 2% since the F_O_M_C (yellow). The R2K saw its biggest 2-day drop in 5 months in addition to its Death Cross. The R2K is now down -2.5% for the year to date and -6.8% from July highs.

Of the 9 S&P sectors since the F_O_M_C, the defensive Healthcare is the only one still holding gains.

The VIX, which I have posted numerous times as a picture perfect reversal process...

An inverted Igloo with Chimney reversal process and head fake move, saw its biggest move up in 2 months.

As we are watching Gold and GDX and to a lesser extent, Silver (because of the manipulation), Dr. Copper was down 1.52% on China growth issues...

Copper vs the SPX (green)...

You saw today's important near term and longer term Leading indicators, an important post...Leading Indicators / TLT Update

Keep those in mind as you look over the next series of charts as well as what the two important sentences were from Friday's last paragraph of the Daily Wrap

"If the 3C charts don't put together an intraday positive after Monday morning, the market will be in big trouble fast...

oversold can quickly turn in to bear material, that's how this market will end."

On the divergences front we expected to see based on a very oversold breadth condition in the market that can quickly turn from simply oversold minor bounces to what I warned of in the same paragraph right above...

 SPY 3 min positive divergence today but...

 However, vs the strong 60 min chart, well you know what's coming, it's just a matter of how long we can get it to hold to finish positioning.

Along the lines of positioning, our HLF short was down -10.31% today, putting it at a -37.5% gain...

The 3 places in a H&S (HLF) I'll short and the one I won't, the red arrow is our last short entry.

Our SCTY position (short) is at a +15% gain, FXP just entered is at a +14% gain, NFLX is at a +7% gain, FSLR short is green as well, but there are still a lot of great looking set-ups, almost there.

 The QQQ negative divegrence last week as expected and the positive today, but on a 3 min chart so we are seeing what we expected for the early portion of this week thus far... however...

QQQ 30 min leading negative right at our head fake move...

The IWM put in a 5 min positive divegrence today as expected...

However, this powerful 2 hour chart shows you how long IWM has been under distribution and just why it's acting so bad with 40+ % of its component stocks already in a bear market.

Now, given the divegrence, keep this in mind.

Our Dominant Price Volume Relationship saw a STRONG Dominant relation in every average, 25 of the Dow 30, 89 of the NASDAQ 100 , 1506 of the Russell 2000 and 415 of the S&P-500, the relationship was Close Down/Volume Down or what I call, "Carry on". The volume was bound to be down vs. Friday's Quad witching, but the sheer number of component stocks down on the day (and that's just 1 of the 2 down relationships) is overwhelmingly bearish and 1-day oversold.

Of the 9 S&P Sectors, EVERY ONE closed red. Of the 239 Morningstar groups, 227 of 239 were red on the day. This is one of the worst 1-day oversold conditions we have ever seen.

However, t doesn't stop there, take a look at a few of the breadth charts, I added many more last Friday and Thursday...

 This is the August cycle with the head fake, the green is the indicator, the red is the SPX unless otherwise noted. The 4 week New High/New Low Ratio at new lows despite price being up, it's at the same level where our original oversold bounce started, this is bad.

 The same indicator on a 13 week new high/new low ratio...

The 26 week new high/new low ratio

Can you see the destruction in breadth  right at our head fake move?

The New High/ New Low Ratio...

And now...

 The Percentage of NYSE stocks 1 Standard Deviation Above their 200-day moving average...Now hitting new lows for the August cycle, compare to where prices are...

  The Percentage of NYSE stocks Above their 200-day moving average...again, another new low for the August cycle, comparing where price is, is essential...

  The Percentage of NYSE stocks 2 Standard Deviations Above their 40-day moving average...Another new low for the cycle and note the destruction in breadth since July 1, the end of Q2 Window dressing.

This is  The Percentage of NYSE stocks 2 Standard Deviations BELOW their 200-day moving average... HITTING NEW HIGHS FOR THE YEAR AND BEYOND!!!

THE YELLOW ARROW IS WHERE THIS INDICATOR OF DEEPLY OVERSOLD STOCKS WAS JUST 2 DAYS AGO.

Basically, the conversation I suggested you consider between the best entries and the big picture, as I said Friday, is pretty much no longer a dialogue, although we'll always try to get the best entries, it's a necessity now in my view, I'm prepared and very excited for an opportunity I think no one alive has seen.

However, one bridge at a time, the next thing is whether those divergences hold and what assets are giving the best entries and the lowest risk, you saw the Financials post today, FAZ Trade Follow Up/ Set-Up I think this is a great set-up, there are many more and if that bounce can hold and it should on a market this oversold, we hit the jackpot. If it doesn't hold as I mentioned in red from Friday, we still hit the jackpot. There's almost no downside, based on nothing but downside.

I suspect we get out early week bounce, HYG's chart seems to support that.